Having declared full Chapter 7 bankruptcy over seven years ago, I am hesitant to give financial advice. I mean hell, what do I know? I messed up BAD, after all.
It was a hell of a lesson, but one that I learned from and I am determined to not repeat.
Recently, however, several financial situations came up that reminded me – just because I haven’t been perfect, there are still lessons I can and should pass on.
Lesson #1 – Establish Your Reliability
I recently flubbed up and issued a large payment out of the wrong bank account. It meant an overdraw of hundreds more than I had in the account and of course, there was an overdraft fee.
That overdraft fee was refunded when I went to the bank and explained the situation.
The clerk looked over the banking history, “Wow, you never bounce checks, EVER.”
They refunded me the fee, even though the mistake had been my fault, because I thought to ask AND I had a pristine record of not bouncing checks.
You can establish your reliability, and keep slush funds in your account even if you don’t make a lot of money by following the next lesson – creating a budget.
Establishing your financial reliability is crucial to avoiding the fees, charges, and more that will not only damage your credit, but make life a little more expensive.
Lesson #2 – Create a Budget and Stick to It!
I have been using a budget, rather obsessively I might add, for more than 20 years. It’s morphed from hand-written in a notebook to an Excel file – but it remains pretty much the same.
- Income – This means counting all sources of income – my husband’s is easy, mine comes from multiple sources (writing, teaching, cleaning biz, and caretaking)
- Expense – Whether it is monthly or non-monthly expenses, it includes everything I can think of from home repair to my daughter’s summer camp expenses, long-term and short-term savings, and the costs of renovating the two properties we are turning into Airbnb’s
- Creating a slush between the two – Not only can your expenses not exceed your income, but you need a slush fund because, let’s face it, life happens. The flat tire on a busy highway or the suddenly dead refrigerator are an inevitable fact of life – crap happens when you least expect it or want it. I strive for a $300 slush between total expenses (this includes savings) and total income.
Part of creating a realistic budget includes tracking where your money is being spent. I use Quicken. It has its issues and quirks, but frankly, there aren’t a ton of financial software programs out there that seem to fit my needs, which includes being able to categorize my spending into specific categories that match my expectations. So Quicken does all right with that. In any case, I advise everyone get Quicken, but you could do some kind of Excel file if cost were an issue.
What helps with financial software is that you are able to truly examine WHAT you are spending your money on.
You might be sipping your double macchiato frappe from Starbucks and thinking, “I barely spend any money!” but that $5.49 that you just spent on your way to work, can turn into right around $120 in coffee splurging in just one month. Comparatively, a bag of coffee at IKEA will cost you $5.99 and last you all month.
Lesson #3 – Avoid Rolling It Over
While I was sitting in the bank with my favorite bank officer getting that mess all worked out, we got to talking. Eventually, it shifted over to responsible financial behavior and the lessons I had learned from bankruptcy.
I told him, “Nowadays, if I can’t afford to pay off a “special 0% offer” within the time frame allowed by the credit card, I don’t take it. Say I’ve got a credit card offering me 0% for 18 months, if, and only if, I can pay off the entire balance in 17 months easily, I won’t borrow the money.”
“Well you could just roll it over into another 0% card,” he said in response.
“And that’s what messed us up the last time. I was borrowing money without a clear payoff date and without the resources to pay it off.”
Look at it this way, the goal should be to be debt-free and have a significant reserve of money (on books and off in the form of cash). Strive towards that goal.
When we found ourselves having to accept an high interest rate on a loan for the RV, I paid the maximum I could afford to pay (over 3x their minimum payment) and then paid the balance off with a 0% credit card offer that I knew I could finish paying off in 18 months. The same thing happened with the Cottage East – I knew it desperately needed a roof, so we signed on the dotted line for nearly 10% interest rate, and I immediately began paying 4x the minimum payment and just recently put into play a 0% offer for 18 months with only a 2% transfer rate. The remaining balance on the roof will be paid off in the half of the time I originally planned on and just 1/4 of the time that they expected, saving us over $1,000 in interest.
Rolling your balances over into 0% offers and only paying minimums, endlessly extending the debt with no payoff date in sight, is courting disaster.
Meanwhile, a dozen things could go wrong. You could get in an accident, lose your job, have to take time off of work, et cetera. Avoiding the rollover, and even better, avoiding the debt in the first place should be your plan – not extending the debt indefinitely.
Lesson #4 – Build Your Reserves
There are actually two parts to this that I will go into detail below, but the bottom line is, shit happens. You are going along, happily on your way to work and your tire blows out, or you come home to a busted water heater, or a dozen other little things that happen when you least expect it and most certainly when you cannot afford it.
So build your reserves. Take the extra $25 or $50 and set it aside. Build those reserves so that when shit happens, and it most certainly will, it hurts a little less.
Here is how I try to avoid life’s bumps in the road…
- Establish a non-monthly expense account and put a set amount into it each month.
I actually refer to this as our NME account and it is a monthly amount I set aside to handle the non-monthly expenses such as (but not limited to): car repairs, car insurance, home repair, the kiddo’s education and summer day camp expenses, gift buying, and clothing.
- Have an emergency fund of cash available at all times
Cash is king. Have you gotten a tip? A couple of twenties from your favorite relative? Set it aside. My goal is to have at least $5,000 available, in cash, at any time. I haven’t gotten there yet (not even close) but it is a cushion for when the crap hits the fan or I see something I want to buy on Craig’s List (or some other place that only takes cash). It will be worth your while to do this – even if it means cutting back on a beer or two, a run to Mickey D’s for your favorite combo meal, et cetera. Build that reserve – because crap happens ALL THE TIME.
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